Car Straw Purchase 101: Everything You Need to Know About It
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Buying a car when you have poor credit is a challenge. Though you may have the money to move forward with a purchase, sellers and lenders don't want to deal with you because of past financial slip-ups.
Though you have other options, there's one you'll want to avoid no matter what: straw purchases.
A straw purchase is an illegal practice that can spell trouble for buyers, sellers, and lenders.
Let's look at the elements of a straw purchase and go over other options for buyers with low credit scores.
What is a straw purchase?
Straw purchasing is the practice of falsifying loan documents to get a low credit buyer into a new car. Someone with good credit, or a straw purchaser, fills out loan documents while having no plans to own or drive the vehicle. A separate party with low credit makes payments on the loan and drives the car, deceiving the lender in the process.
Is straw buying cars illegal? Yes, it is. The wording on loan documents specifies that the main person filling them out must be the primary driver of the purchased vehicle. Additionally, the straw purchaser is responsible if the loan is in default, while locating the valid owner isn't possible.
Types of straw purchases
There are two different types of straw purchases, one initiated by the buyer and the other by the seller. Both offer few benefits in the long run, so it's best to avoid them altogether.
In a buyer-initiated straw purchase, a person with good credit – the straw buyer – fills out loan documents in their name to secure financing for someone else with low credit.
In a seller-initiated straw purchase, a person with poor credit allows a person with good credit to fill out loan documents under their name. A seller-initiated straw purchase involves a person with poor credit bringing along a co-signer, who's then fooled into buying the car for themselves.
A straw purchase is a fraudulent process all around. An auto loan is a legal document, and because the straw purchaser attests to the accuracy of the false information they provide, they're breaking the law. The straw purchaser accepts all financial and ownership responsibility for the purchased vehicle, despite another party intending to fulfill those obligations.
Because a straw purchase masks the person paying the loan, it does nothing to help rebuild their credit. And if the straw purchaser decides at any point to keep the car for themselves, the person who's been making payments has no recourse.
The seller initiates the following type of straw purchase:
In one straw purchase scam, the seller asks the low-credit party to refrain from signing any loan documents under the pretense of avoiding extra fees or higher interest rates.
Another type of straw purchase deception occurs when the seller tricks both the co-signer and party with poor credit into signing separate documents. The seller may explain they need the additional documents to be approved. But the problem is, only the forms filled out by the co-signer are used, making them responsible for owning and paying for the vehicle.
Whether you're looking for a car, truck, or SUV, Shift has what you need. Shift also has in-house financing, making them your one-stop shop when buying a used vehicle.
2019 Mazda CX-5 Grand Touring (from $29,950)
Protecting yourself from straw purchase scams
A buyer with low credit and an eager seller can create a risky situation. The seller, determined to unload inventory, might use various deceptive practices to push through a transaction.
One key to shield yourself from fraudulent actions is arming yourself with information. Get a credit report from one of the major credit bureaus, like Experian, so you know what types of loans you qualify for and their interest rates. If the seller attempts to deceive you, having this information on hand is a valuable tool.
If you have a co-signer helping you obtain a loan, make sure they go over the details with you every step of the way. You both have to sign the same contract on a valid loan, so be on the lookout for independent forms. Additionally, authentic loan applications will have distinct lines for the applicant and co-signer on the same page.
Another step to ensure the validity of your loan application is asking to view the approval documents. Both your name and your co-signer's name should be present on all paperwork. If only one or the other is listed, take it as a red flag to not proceed with the agreement whatsoever.
With Shift's experience and expertise selling used cars, you can trust them every step of the way. With their seven-day return policy, you can drive your new purchase for a week, knowing you'll receive a refund if unsatisfied, no questions asked.
Co-signed Loans for Buyers With Bad Credit
If you have a bad credit situation, you face an uphill climb when buying a vehicle. But there's a way to secure a loan despite having poor credit history and improve it in the years to come, too.
If you have bad credit yet have the financial resources to make monthly payments, consider getting a co-signer. A co-signer is a trusted family member or friend who vouches for you and promises to pay a loan if you default. Since lending institutions get an extra layer of security with a co-signer, you have a better chance of obtaining financing and rebuilding your credit.
A convenient feature of a co-signed loan is the flexibility regarding ownership of the purchased vehicle. Depending on preference, either the party with poor credit or both signees own the vehicle collectively.
Shift takes the hassle out of buying a used car. After finding the vehicle you want on their website, a Shift concierge will drive to you in some markets so you can take a test drive before signing the papers. This no-obligation test drive is another reason Shift is an excellent way to go when buying a used car. Shift works with a trusted network of lenders including Bank of America and Capital One. You can apply – with or without a cosigner – within minutes from the Shift website.
2020 Toyota Tacoma TRD Sport (from $41,950)
Summing up straw deal car purchases
Though having a low credit score presents a challenge when you're in the market for a car, there are both good and bad ways to deal with it.
What you don't want to do is take part in a straw purchase, where you're technically committing fraud and putting yourself at risk. Although a straw purchase may get you behind the wheel, in the end, the potential consequences aren't worth the trouble.
Conversely, getting a co-signer to help you finance a vehicle is a legal way to get the car you want while at the same time rebuilding your credit.
When you want the best price on a used car, Shift delivers. When you choose Shift, you get a fair, no-haggle price driven by powerful machine learning algorithms and tons of data. And with Shift's best-in-industry service contracts, your vehicle will last year after year.
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April 15, 2022
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